M&A a ‘priority’ as Magellan attempts reset

The investment manager’s chairman, Hamish McLennan, is out to convince shareholders to almost double directors’ pay as he tries to rebuild the embattled funds outfit.

Hamish McLennan says he will stay at Magellan ‘as long as I’ll need to” as he attempts to turn around the funds manager. Picture: John Feder

Magellan Financial chair Hamish McLennan says M&A will become “a priority” for the investment manager in the six months as it attempts a reset after a year of instability and poor performance.

“We‘ve got a strong balance sheet, we’ve got cash in the bank … I think M&A will become a priority for us over the next six to 12 months,” said Mr McLennan, who took over after the departure of high-profile stockpicker Hamish Douglass. “I can’t give you any absolute guarantee that it will happen, but we are looking at it.”

There were a number of alternative fund opportunities in the sector, Mr McLennan added.

“We see ourselves as being the acquirer but if anyone stepped forward and wanted to offer a huge premium we’d have to look at it,” said Mr McLennan. “I think the industry will continue to continue to consolidate.”

There’s been a flurry of takeover activity in the funds management space this year with Perpetual making an agreed $2.7bn takeover offer for Pendal before itself becoming the target of a takeover approach from private equity giant EQT with Regal Partners. However, the Perpetual takeover will proceed.

Fund managers are looking to merge to stem the rising cost that come with a loss of scale from outflows, seen across the globe as a result of economic instability, and as more people move into lower fee exchange traded funds.

Mr McLennan sees Magellan as the hunter of other fund managers, but it could become the target if shareholder dissatisfaction remains high and instability of its investment team continues.

Magellan shares have fallen 66 per cent over the past 12 months to close at $9.79 on Friday, with investors concerned about the changing investment team and as ratings agencies downgrade various Magellan funds.

In an interview ahead of a shareholder meeting to approve a significant hike in fees paid to the company’s directors, Mr McLennan said Magellan would not attract “the right caliber of people” until director fees were increased.

“I do except that a lot of shareholders are unhappy with what’s happened to the share price,” he said. “We are moving from a founder led organisation that was heavily reliant on the (share purchase plan) and basic salaries.

“We’re in the 25th percentile for equivalent board in other financial institutions and we simply weren’t going to recruit the calibre of directors.”

Magellan told investors in November that it wanted to increase directors’ fees from $77,000 per year to $125,000. Mr McLennan would be the biggest beneficiary of the change, with chair fees to rise from $77,000 to $215,000.

The fund manager has 4 independent non-executive directors, a number that will increase to 6.

Magellan’s funds under management halve to $50.9bn after a difficult 12 month period where Mr Douglass, its founder and chief investor, made poor bets on US tech stocks and then departed suddenly due to unrelated personal controversies.

The Australian understands several people sounded out to join the board since Magellan’s troubles began have declined. “We were out there with a headhunter not attracting the caliber of director that wanted,” Mr McLennan said. “We’ve gone though a long list of interviewed people.”

As part of an overhaul following the departure of Mr Douglass – and before him, the company’s chief executive Brett Cairns – Magellan has installed ex-Future Fund deputy chief investment officer David George as CEO. Some 10 other staff, including senior portfolio managers and investment-related employees, have also been made redundant while Craig Wright, who ran Magellan Capital Partners, has left.

Mr McLennan did not agree that it would be worth waiting for Mr George to rebuild the investment manager’s performance before asking for the fee increases.

“If it was six or 18 months from now I still think there would be negative sentiment in the marketplace. I think it’s a priority to show board renewal and to get a broader skill set in to the board.” Mr McLennan said on Friday.

Mr McLennan is also the chair of online real estate listing company REA Group, controlled by News Corp Australia, publisher of The Australian. Others on the board include former Wallabies rugby union captain John Eales, Colette Garnsey, who is on the board of Flight Centre and Seven West, Robert Fraser, the managing director of Taylor Collison’s corporate advisory division. It recently announced the appointment of David Dixon, the former chief investment officer at First Sentier Investors, to the board.

“It has been incredibly challenging,” Mr McLennan said, referring to the last 12 months at Magellan. “But I’ll stay here for as long as I’ll need to.”